Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Insmed Incorporated (NASDAQ:INSM) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Insmed’s Debt?
The image below, which you can click on for greater detail, shows that at September 2021 Insmed had debt of US$557.6m, up from US$351.1m in one year. However, its balance sheet shows it holds US$846.6m in cash, so it actually has US$289.0m net cash.
How Healthy Is Insmed’s Balance Sheet?
According to the last reported balance sheet, Insmed had liabilities of US$112.5m due within 12 months, and liabilities of US$694.4m due beyond 12 months. Offsetting these obligations, it had cash of US$846.6m as well as receivables valued at US$19.3m due within 12 months. So it can boast US$58.9m more liquid assets than total liabilities.
This state of affairs indicates that Insmed’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it’s very unlikely that the US$3.12b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Insmed has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Insmed can strengthen its balance sheet over time.
Over 12 months, Insmed reported revenue of US$174m, which is a gain of 3.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Insmed?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Insmed had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$354m and booked a US$424m accounting loss. However, it has net cash of US$289.0m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly.